Income Tax Return Filing For Futures And Options (F&O)Traders : All You Need To Know

How to Report F&O Trading as Business Income

According to Section 43(5) of the Income Tax Act, profits or losses from Futures and Options trading fall under non-speculative business income. Therefore, it is essential to declare any profit or loss from F&O under the head Profits & Gains from Business and Profession (PGBP).

ITR Form Appropriate for Filing F&O Income

As F&O income falls under the business income category, individuals involved in F&O trades must file their profit or loss using the ITR-3 form.

This form is specifically designated for taxpayers with PGBP Income.

Tax Implications of Other Investments

Apart from F&O trading, your tax obligations may differ based on other investments, such as intra-day trading or long-term and short-term investments:

• Intra-day Trading: This should be treated separately as speculative business income, distinct from F&O trading.
• Short-term Equity Trades: Depending on the volume and frequency, these can be categorised as either business income or capital gains. Consistency in your approach across financial years is crucial.
• Long-term Equity Investments: Gains from these investments typically fall under capital gains.

Do F&O Traders Need to Maintain Accounting Records?

Since F&O trades constitute business income, traders must comply with mandatory tax regulations in this regard.

Suppose you are running the business as an individual or a Hindu Undivided Family (HUF), and your income exceeds Rs 2.5 lakh or gross receipts exceed Rs 25 lakh in any of the 3 preceding years or the first year of business if it’s new, then you are required to maintain proper books of accounts.

However, for taxpayers other than HUF or an individual carrying on a business, the income limit is Rs 1.2 lakh, and the gross receipts limit is Rs 10 lakh.

So ensure that your trading statements, bank statements, and expense receipts are handy since your profit and loss account (P&L) and balance sheet will be prepared from these documents.

Audit and Return Filing

For the majority of taxpayers, income tax returns are meant to be filed by July 31 every year. However, for entities where an audit is required, the last date is September 30.

According to the laws, an audit applies to a business if its turnover is more than Rs 1 crore. So, if you fall into this category, you need to appoint an independent chartered accountant to audit the accounts.

While filing returns, the assessee is required to submit the audit report along with the tax return. Also, if you do not maintain proper books of accounts, the department could impose a penalty.

Assessing F&O Turnover

Futures and Options trading turnover is determined based on the absolute profit derived from the transactions. Absolute turnover refers to the total of positive and negative differences between the purchase sale prices.

It is important to note that from Assessment Year 2022-23, the turnover for options trading includes only the absolute profit, excluding premiums from the sale of options.

Let us consider a scenario where Rahul engages in F&O trading:

• Rahul buys 50 units of futures at ₹300 and sells them at ₹320.
• He also purchases 100 units of options at ₹200 and sells them at ₹180.

In this example, Rahul's F&O turnover is calculated based on the absolute profit generated from futures trading, adhering to the updated guidelines for options trading turnover.

Is Tax Audit Mandatory for F&O Trading Under Section 44AB

Section 44AB of the Income Tax Act specifies the conditions for a tax audit:

• Section 44AB(a): If the total turnover from F&O trading exceeds Rs 10 crore, an F&O trading tax audit is mandatory.
• Section 44AB(e): A tax audit is also required if the trader opts for the presumptive tax scheme under Section 44AD(1) and the taxable income exceeds the basic exemption limit.

Tax audits are covered under another section – Section 44AD. Let us examine this section.

• Section 44AD(1): Individuals or entities with turnovers up to Rs 2 crore can declare taxable income at 6% of their total turnover.
• Section 44AD(4): Once an assessee chooses the presumptive tax scheme under Section 44AD(1), the assessee must continue in the scheme for five years. Opting out and declaring lower income or losses than the presumptive rate mandates a tax audit under Section 44AB(e).

Understanding these sections helps clarify when tax audit on futures and options becomes necessary for F&O traders under the Income Tax Act.

When is Tax Audit Required for F&O Traders

Tax audit becomes applicable to F&O traders based on their turnover, as outlined below:

• For trading turnover up to ₹2 crore:

• If the profit or loss from F&O trading is less than 6% of the turnover and the taxpayer has opted out of presumptive taxation in any of the past five years, a tax audit becomes mandatory if total income exceeds the basic exemption limit (Section 44AB(e)).
• If the profit is 6% or more of the turnover, a tax audit is not necessary.

• For trading turnover between ₹2 crore and ₹10 crore:

• If more than 95% of transactions are digital, a tax audit is not necessary, regardless of profit or loss (Section 44AB).

• For trading turnover over ₹10 crore: 

• Tax audit is compulsory irrespective of profit or loss (Section 44AB(a)).

Tax Benefits: Losses Can Be Set-off And Carried Forward

One reason people can opt to trade futures and options is to be able to obtain the benefit of losses incurred.

If the business results in a loss, the assessee can adjust it with the profit made from other heads of income, such as rental income, interest income, etc., except for salary income.

If there are any unadjusted losses, these can be carried forward for 8 years. However, in the future, they can only be adjusted from non-speculative income (F&O trading loss is considered non-speculative, while intraday stock trading loss is considered speculative).

Let’s understand this with an example:

Mr. A, after hearing from a friend, opened a trading account with a broker by paying Rs 500 as account opening fees and annual charges.

For every F&O trade, the broker will charge 0.02% as brokerage. A paid nearly Rs 1 lakh as brokerage during the year and incurred around Rs 25,000 towards his telephone bills.

On skimming through the statements, Mr. A found that 50% was towards F&O trades. Also, Mr. A has a high-speed internet connection at his home, for which he pays Rs 1,000 per month.

When checking on the fiscal year profit and loss, Mr. A found that he lost Rs 2 lakh in F&O trades on a total turnover of Rs 20 lakh.

Mr. A is unsure if he should report the loss. Also, in addition to salary (Rs 2 lakh per month), Mr. A earns Rs 75,000 as interest income and Rs 1 lakh as rental income.

So, to take the benefit of the loss, Mr. A should report the same. His F&O expenses would be as follows–

• Brokerage enrolment charge – Rs 500
• Brokerage – Rs 1,00,000
• Telephone expenses – Rs 12,500 (50% of Rs 25,000)
• Internet – Rs 12,000 (Rs 1,000×12)
• Total = Rs 1,25,000

Let us now see the computation of taxable income –

• Loss from F&O – Rs 2,00,000
• Less: F&O expenses – Rs 1,25,000
• Total F&O loss – Rs 3,25,000

Thus, the total taxable income for Mr. A is –

• Salary Income – Rs 24,00,000
• Rental income – Rs 1,00,000
• Interest income – Rs 75,000
• Non-speculative loss – Rs 3,25,000
• Total taxable income  -  ₹24,00,000

Loss to be carried forward – ₹1,50,000 (-3,25,000 + 1,00,000 + 75,000)

In this case, income from the business is ₹(1,50,000). The presumptive income @ 6% of his turnover is ₹1.2 lakhs, which is more than ₹(1,50,000).

Also, the total taxable income is ₹24 lakhs, which is higher than the basic exemption limit of ₹2.5 lakhs. Thus, a tax audit and filing of the balance sheet and profit and loss in the income tax return become mandatory in such a case.

Can F&O Traders Claim Expenses?

F&O traders can deduct business expenses from their income, even if they incur losses from trading.

In this case, you must ensure that you only claim expenses that are directly and exclusively related to your trading business. These may include brokerage fees, commissions paid to brokers, subscriptions to trading journals, telephone and internet costs, fees for professional advice, and salaries paid to assistants.

It is crucial to maintain accurate records of receipts and bills. Using digital payment methods is recommended over cash transactions. Moreover, if your expenses exceed ₹10,000 in cash, they may not qualify for deduction. When an expense serves both personal and business purposes, you can only claim a fair proportion that relates directly to your business activities. 

Should F&O Traders Consider Opting for the New Tax Regime

Futures and Options traders can choose to pay taxes under the new tax regime as per Section 115 BAC of the Income Tax Act.

Here are some important factors to consider:

• Tax liability will be determined using the specified slab rates in the new tax regime.
• Deductions under Chapter VI-A, such as Section 80C and 80D, cannot be claimed under the new regime.
• Traders involved in business activities who switch from the old tax regime to the new regime can revert to the old regime only once in their lifetime. Form 10-IEA must be filed to opt out of the new tax regime.

The Bottom Line

If you are an intra-day trader, ensure to report all your gains and losses while filing your income tax returns to avoid penalties and notices from the IT department.

Reporting income tax on F&O trading in India is crucial under Indian tax laws. It is essential to categorise F&O gains or losses as non-speculative business income, file using the appropriate ITR-3 form, and maintain clear records of all expenses and turnover calculations. If you find it difficult to assess your tax liability, consult an experienced chartered accountant (CA) for your requirements.

Disclaimer: The information related to the tax filing presented in this blog post is generic. Please consult your tax advisor for tax filing advice about your case.